Many investors look for a way to make money and feel good about doing it, wanting to combine an ethical choice with a profitable outcome.
This green investing discussion is on the boil south of the border as the 2020 presidential race gets under way. Canada has focused on carbon taxes as its way to tackle climate change. This approach taxes emissions as a way to provide companies with incentives to lower them. But in the U.S., the Democrats are talking about something far more radical. It is called the Green New Deal.
The Green New Deal is a big idea with few details for now. The name recalls U.S. president Franklin Roosevelt’s New Deal in the 1930s. FDR’s programs were aimed at restoring hope during the worst years of the Depression and included government spending on infrastructure to build highways, bridges, dams, and hydroelectric projects. One goal was bulk up the economic backbone. The other was to provide a pay cheque to the unemployed, giving them money to spend, which in turn created a virtuous circle of demand for goods and services.
The Green New Deal also offers hope. One goal is to slow climate change. The other is tackle income inequality by offering a living wage to the lowest on the ladder. The ‘how’ for all this is as yet unknown, except that the tools are a massive government hand in almost everything. This hand would direct investment, offer subsidies to certain industries, and tax others more heavily. It is meant to transform the energy sector and the broader economy.
For investors, the Green New Deal falls under the umbrella of socially-responsible investing. SRI offers a way to feel good beyond a donation to charity, because the investment puts money into the pockets of companies whose activities align with your beliefs. The investments often come with incentives, or tax breaks. This is because they may not make financial sense without them. Many of the companies are startups or in the early stages of development with big cash needs. They may have great ideas, but no commercial product.
Green energy is a theme within SRI. It invests in companies that produce energy from renewable resources such as hydroelectric, solar power, wind, and geothermal power.
It also tends to involve higher risk, because these approaches favour technology that’s often new and untried. Bitcoin and the cannabis boom are examples of the kinds of risk leading edge companies must take. Companies in the Green energy field are trying to build a business and need cash to do it. Their newness creates media attention, which becomes self-reinforcing.
The biggest knock against theme investing is that it shortcuts the decision making process. The theme becomes the paramount factor, so you bypass a more thorough analysis. The process should start with your strategy and whether energy holdings have a place in your portfolio at all. From there you might look at your risk tolerance and need for dividends. Then you might look at individual stocks, filtering for quality, a history or rising sales and profits, and so on. One factor would be whether it aligns with your beliefs.
And how green is green enough? Winnipeg’s New Flyer Group (TSX:NFI), an IWB recommended stock, has a commanding share of the zero-emission bus market in North America. NFI has more electric buses on the road than any other manufacturer. That’s quite an achievement. Yet electric buses are a small part of overall bus fleets. New Flyer has 44,000 heavy-duty transit buses in service of which about 20% are powered by electric motors.
How to succeed
John Cook, president of Greenchip Financial Corp., has been in the green investing space since 2008. Cook doesn’t really like the term ‘green investing’, which he believes connotes all the worst things about the sector, including the hype and cynicism surrounding its products. He sees it as smart investing, by positioning yourself to take advantage of a generational shift in how the economy is powered.
“As investor you want to be on the right side of that change,” he says.
Greenchip manages an $80 million Global Equity Fund which was launched in 2008. Endowments, pension funds and companies own 80%. Cook’s personal wealth is completely invested in the fund, which is available to retail investors though at a hefty minimum contribution of $250,000.
Cook believes it is risky for governments to pick winners in renewable energy technologies. Today’s players may not be tomorrow’s survivors. So, when it comes to the Green New Deal, he believes a more effective government role is underpinnings and regulation – such as electric car infrastructure or setting fuel consumption levels for cars.
While green investments are often sold as a do-good theme, Cook sees it as an economic decision. The Industrial Revolution moved first from wood to coal, then to oil, natural gas, and nuclear. Each of these fuels was transformative, triggering leaps in economic activity.
Now we’re seeing another generational shift, as we move to renewables such as wind and solar.
“It is one of those great energy transitions,” Cook says.
The change is all around us, but we don’t always associate it with energy. We’re buying smart powered fridges and thermostats that can raise and lower temperature via smartphone apps. Higher efficiency furnaces save natural gas and flex fuel cars cut gas consumption.
Greenchip’s portfolio is interesting. It has plenty of renewable energy companies, but also companies that make products for cleaner cars, homes, and factories, including the software to run it. The holdings include conglomerates like Siemens and Hitachi. Another holding is Johnson Controls, which makes car batteries, electronics, and HVAC equipment. Cascades, which makes packaging and tissue products from recycled fibres, is also a holding.
Cook is a fan of New Flyer Group, as well as Swiss engineering giant ABB and Brookfield Energy Renewables, both recommended below. All three have been in his fund at one time.
Greenchip has a very respectable record. Its three-year average annual gross return (before fees and expenses) is 15.6% as compared to 11.6% for the MSCI World Index. Since inception, it has averaged an average annual return of 8.2% versus 7.2% for the MSCI World.
Cook says a retail investor might dip a toe in these waters with a holding of 5% of a portfolio and suggests a diversified fund is a way to go. As always, this is something to discuss with your advisor.
If you can’t afford the Greenchip fund, the company is a sub-advisor to the new Mackenzie Global Environmental Equities Fund. It has only been around since October, so we don’t have much history to work with. However, the year-to-date gain of 13.25% (to March 11) is impressive. The portfolio is basically the same as the Greenchip Global Equity Fund.
The Green promise is already changing the way we do things. But change tends to be continuous and incremental – evolutionary rather than revolutionary and it comes in direct and indirect ways.
It pays to think outside the theme and make a choice based on whether the investment aligns with your objectives and go from there.
The choices below have strong businesses, a history of profitability and pay dividends. Their added appeal is that they stand to gain from green power evolution.
Brookfield is a renewable leader
Brookfield Renewable Partnership (TSX: BEP.UN, NYSE: BEP) is one of the world’s largest publicly-traded renewable power companies. It operates in 30 countries where it owns hydro, solar, and wind generating facilities. It was spun off in 2011 from its parent Brookfield Asset Management, which owns 61%.
Performance: Results can be choppy, but the five-year trend is broadly higher. The units are currently trading near the top of their 52-week range. The units are up 13.4% year to date and 2.57% in the past 52 weeks, as of the time of writing.
Why is it green? Brookfield is a global leader in hydroelectric power. Some 76% of its portfolio is hydro with wind (20%) and solar (4%) providing the remaining energy. Solar is the renewable energy gold standard because, once built, their plants are long lasting and have minimal environmental impact.
Recent developments: In 2018, Brookfield scored well on most important measures. For the year ended Dec. 31, revenue rose 13.6% to $2.98 billion and net income swung to a profit of $42 million, from a loss of $56 million in the previous year. Funds from operations (cash flow, plus depreciation) rose 16% to $676 million. New plants and higher power generation were behind the gains.
Outlook: Brookfield sells 87% of its power under long-term contracts, which locks in prices, thus allowing it to generate stable cash flow. The company pays out about 90% of that cash to investors.
It has spent more than $3 billion since 2012 on acquisitions. In 2018, it increased its stake to 30% in wind and solar company TerraForm. It operates mainly in Brazil, India, and China, although it produces wind energy in Ontario.
In 2019 Brookfield will continue to develop two hydro facilities in Brazil, two European wind farms, and an energy storage facility in the U.S.
Like most utilities, Brookfield borrows to build its plants. It has $11.7 billion in long term debt, which makes it interest rate sensitive. Rising rates hurt the unit price in 2018, but signals by the Federal Reserve that more increases are on hold has lifted the stock since Christmas.
The company is guarding against rising rates by extending the average maturity of its debt to 10 years. There are no material debt maturities until 2023.
Dividend: The US$2.06 dividend yields a high 6.6% and has been increased in each of the last five years. It was raised again by 5.1% with the March payment.
The 2018 annual report notes that in every year since it was formed in 1999, (the year it was recommended in The Income Investor at $16.62 a share) it has delivered a 15% annual, compounded rate of return to unit holders.
ABB is sees an electric car future
ABB Group (NYSE:ABB) is multinational Swiss-Swedish engineering company with 2018 revenues of $27.6 billion. The company is a technology pioneer and its North American research centre, which is developing electric car and train technology, is based in Montreal.
ABB has four operating segments. Electrification Products (29% of revenues) makes a variety of equipment including the charging system for electric vehicles. Robotics and Motion (19%) makes power electronics and industrial robots. Industrial Automation (24%) is ABB’s artificial intelligence unit, making systems to control factories. The Power Grids division (28%) makes components for transmitting and distributing electricity.
In December, ABB announced the sale of its Power Grids division to Hitachi in an $8.8 billion deal that closes later this year.
Performance: The stock is down since Gordon Pape originally recommended it in October 2017, but it has rallied from its 52-week low of $18.05, touched in December. The stock is unchanged year-to-date, and off 21.2% in the past 12 months. ABB’s p/e ratio is 18.78 – not cheap but not over high either.
Why is it Green? ABB is a leader in electric vehicle charging systems. This includes all the pieces of the future gas station – the bays, the plugs, and the software that runs it. It is also a leader in clean factories, through its Robotics and AI units. ABB was in the Greenchip Equity Fund for nine years, but the holding was sold to lock in a profit.
Recent developments: ABB reported 2018 results on Feb. 27. Revenue was 4% higher
than the year before with particular strength in Robotics and Motion. Orders were up 8% year-over-year and the order backlog was up 6%. Profit of $2.17 billion was 2% lower.
2018 was a year of transition for ABB. The sale of its power grid to Hitachi allows ABB to focus on leading edge areas engineering. On April 1, it will be split into four units again – Electrification, Industrial Automation, Motion and Robotics, and a new division called Discrete Automation. Cost cutting is expected to save ABB $300 million a year.
Dividend: Like many European companies, ABB pays only one dividend per year, based on profitability. Last year’s payout, in April, was $0.826 per unit. If that were repeated in 2019, the yield would be 4.3% per cent at current prices.
ABB is trading near the bottom of its 52-week range and offers a low risk way to participate in the growth of the electric vehicles and clean factories. It stands to gain as demand in these areas grows.
This article appeared in the March 18, 2019 issue of the Internet Wealth Builder.